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How to record VAT on expenditure invoices when not VAT registered

By Cheaper Accountant, May 9 2017 08:00AM

The question posed in this blog update is one that we are asked by clients from time-to-time. When a company, which may be a sole trader or a limited company, is registered for VAT the expense for company purchases alongside the VAT are separately recorded and itemised and then the VAT portion of the invoice the company has paid is claimed on the VAT return for the quarter. This is the practice that a large number of clients are familiar with and is the basis of accounting for VAT to support and facilitate the VAT return. However, what do you do if you’re not registered for VAT?

Recording expenditure details when not registered for VAT

Well, you’ll be pleased to hear that the process here is very simple. All you need to do is simply record the gross value of all purchases (or company expenditure). The gross value is the total paid including VAT. There is no requirement to separately identify and record the VAT.

If you were to record the VAT this is likely to result in the understatement of expenditure as the VAT amount when recorded as a separate line item within all of the major accounting software solutions would result in a debtor (an amount owed to the company) on the balance sheet and indicate that the sum needs to be reclaimed from HMRC within a VAT return. Obviously this would be incorrect for anyone who is not VAT registered.

What if I subsequently register for VAT?

We don’t see any major issues under such circumstances as there are a fairly limited number of expenses that can be reclaimed retrospectively. Nevertheless, we do advise all clients to maintain adequate records of all invoice paperwork to ensure that the VAT on previous expenditure can be claimed under the limited circumstances that are endorsed by HMRC.

If you are interested in reading more about retrospective VAT claims then take a look at our earlier blog post and click on the link provided.